The Bullwhip Effect in Supply Chain

Posted in Operations & IT Articles, Total Reads: 8324
, Published on 25 June 2013

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The Bullwhip Effect is a very eminent concept in Operations Management, which first materialized in the year 1961 in ‘Industrial Dynamics’ by Jay Forrester. To comprehend The Bullwhip Effect in supply chain, let us, in a nutshell, see what a supply chain is.

Supply chain

A supply chain is a system which has suppliers and customers at extreme ends. It transfers products or services from suppliers to customers while the products/services keep undergoing evolution or upgradation. It also transfers information regarding demand from customers to suppliers.

In the manufacturing industry, the requisite raw materials are supplied by the supplier to the manufacturer. The manufacturer manufactures the products and passes them on to distributors, who in turn pass them to retailers. The retailers pass on the products to customers.

Thus, the information about supply and demand at each interface is conveyed to the adjoining constituents of the supply chain.

The Bullwhip concept

The demand of products or services from customers keeps wavering and does not follow any particular pattern. So, if the demand from customers for a product or service increases slightly, the demand from retailers will increaseeven more. This is done mainly for two reasons

1. To cater to the current increase in demand from customers and

2. To cater to the increase in demand from customers in the near future. This is done by maintaining a ‘safety stock’ or excess inventory.

Similarly, the demand from distributors to manufacturers will get magnified and so will the demand from manufacturers to suppliers.

Therefore, a small fluctuation in demand from customers results in a highly magnified demand from suppliers. This effect is known as The Bullwhip Effect.

Nomenclature

The Bullwhip Effect, also known as the whiplash effect, is called so because a slight movement at the handle of a whip causes a magnified effect at the tip of the whip, thus depicting the effect of the Bullwhip concept.

The Bullwhip Effect is also known as the Forrester effect after Jay Forrester.

Boon or Bane

Due to the bullwhip effect, every component in the supply chain feels that it is equipped to handle fluctuating demands.

In reality, the inventory keeps increasing at each stage of the supply chain. This causes increased inventory costs. Similarly, if demands fall, inventory required also falls and the fall in demand gets amplified as the information travels upstream. Thus inventory costs are highly impacted by either increase or decrease in demand as are other costs along the supply chain.

The Bullwhip effect can result in inefficient production and thus low utilization of the supply chain.

Real world measures

The solution to the problems caused by Bullwhip Effect is to communicate the information about supply and demand from every interface in the supply chain to the next.

Walmart, the largest retailer in the world, has effectively overcome the Bullwhip Effect. The details of each transaction that occurs every day at a Walmart store are relayed to the Headquarters regularly. Thus, by maintaining transparency throughout the supply chain about the actual demand at the customers end, Walmart has been able to control the Bullwhip Effect efficiently.

Thus, the negative effects of Bullwhip effect can be neutralized by employing an effective supply chain strategy.